Avantha divestment in Crompton Greaves a positive: Antique

Sonia: I remember speaking to you when this news had come out initially but now the stock is higher by about 3.5 percent. What would your advice be on how to approach Crompton Greaves now post this newsflow?

A: We have been bullish on Crompton Greaves and we maintain the view. Overall the company is in a very strong footing as far as growth is concerned. As you know the company has been split into two, so, power industry business is one and consumer is the other. Consumer business has been doing pretty well and they have done better than competition in last four or five years. We believe that there is a significant opportunity of value unlocking.

Avantha holding selling stake in consumer business will be significant from the point of view of overall liquidity perspective of the group which is positive. However, having said that for shareholders of Crompton Greaves today, the split or the demerger of consumer business itself is positive; that is one thing.

Secondly, as you know there is a lot of potential in the non-consumer business as well with cyclical recovery. So, overall things are going in very right direction and we continue to be very bullish on the stock.

Latha: How will the business split, what will be the relative values of the two businesses when consumer products is demerged?

A: If I look at my estimates for FY16 earnings, earnings will be split roughly 50-50. So, if I look at Rs 12.5 of EPS broadly you can say 50 percent will come from the consumer and 50 percent will come from the non-consumer which is industrial and power businesses.

If I look at the consumer electrical companies in India today which is Havells or few others, the valuations are significantly higher than Crompton Greaves. So, even if I look at maybe 20-22 times FY16 earnings, consumer business should be valued at maybe Rs 120-140 at least.

If I look at the industrial business and power business the fact of the matter is that this business is also going to significantly surprise if recovery happens. So, all the deep cyclical stocks will trade at high PEs at the cyclical downturn. So, even that value can be Rs 140-150.

So, at the outset I would say the stock is worth Rs 260-270 given that they also have some stake in Avantha Power and few other things.

Latha: So investors shouldn’t be put off by the fact that Avantha is selling a part of their stake in the consumer products business because your saying that it will list at such a premium, the two entities, Avantha selling would perhaps disappoint investors?

A: Avantha Holding selling part of its stake, that means promoter selling part of stake in consumer business is his choice in the sense that as a shareholder I would only be concerned about the growth of the company because my shareholding remains unchanged. Pricing, I would focus on what is the growth opportunity in consumer business post it and I think that looks very fine, so, overall very positive.

Sonia: Do you have any clarity on what the royalty payments will be payable to the parent company?

A: It is difficult to say but there is money going from one end to other end. So, if I am shareholder of Crompton Greaves today, it should not matter to me what is the brand royalty to be paid from consumer business to power business because today I am holder of both the companies so it doesn’t matter.